Are India's GDP numbers giving us the real picture?

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In today’s edition of The Daily Brief:

• India’s GDP numbers: A closer look
• EV subsidy scandal: ₹297 crore fraud
• The semiconductor showdown

India’s GDP numbers: A closer look

As traders and investors, we rely on economic data to stay updated. While some numbers only matter to specific industries, big ones like inflation and GDP impact everyone, including policymakers. That’s why this data needs to be accurate. Soon, there will be some big updates in how this information is calculated.

Why? The government is updating the base year for calculating GDP, changing it from 2011-12 to 2022-23. What’s a base year? Think of it as a starting point that helps us compare economic data over time. And it’s not just GDP that’s being updated—other key figures like inflation (CPI), factory output (IIP), wholesale prices (WPI), and producer prices (PPI) will also use the new base year.

To ensure these changes are done right, the Ministry of Statistics and Programme Implementation (MoSPI) has set up an Advisory Committee. This group includes experts from central and state governments, the Reserve Bank of India, universities, and research organizations. Their job is to figure out the best ways to collect and analyze data under this new system.

All of this raises some questions, doesn’t it? Why are these changes being made? Why now? Has this been done before? What happens if we just leave things as they are? And does it really matter if we make these updates? Let’s break it down and understand why this is happening.

Every time we calculate real GDP growth, the goal is simple: we want to understand how much our economy has actually grown—not because prices went up, but because we produced more goods and services.

To figure this out, we need to take inflation out of the picture. How do we do that? By picking a base year (currently, it’s 2011-12) and pretending that the prices of all goods and services today are the same as they were in that base year. Sounds simple, right?

But here’s the problem: this whole method assumes that today’s economy looks pretty much the same as it did in 2011. And let’s be honest—it doesn’t.

Take services, for example. Services were already a big deal in 2011, but they’ve grown even bigger since then. However, when we calculate today’s GDP using 2011 prices, we’re still looking at the economy through a 2011 lens. This means we’re undervaluing the role of services—by a lot. And since services have grown faster than most other sectors, it throws off the entire GDP calculation.

Source: Wikipedia

If we update the base year to something more recent, like 2022, it gives us a clearer and more accurate picture of GDP. Fast-growing sectors like services and other evolving parts of the economy would finally get the recognition they deserve.

So, what’s the key takeaway? Sticking to an outdated base year gives us an inaccurate and misleading view of the economy. That’s a problem not just for investors but also for policymakers who depend on this data to make informed decisions. And while the base year is a major issue, it’s not the only criticism of GDP calculations—there are other challenges too.

The last big update to the base year happened in 2015-16 when the government moved from 2004-05 to 2011-12. At that time, plenty of experts raised concerns about the new methods being used. Let’s look at some of the key issues highlighted by notable voices like Arvind Subramanian (former Chief Economic Advisor) and Rajeswari Sengupta (renowned professor) and others.

1. Problems with the Deflator: India uses the Wholesale Price Index (WPI) instead of the globally preferred Producer Price Index (PPI) to account for inflation. The problem? WPI focuses on commodity prices, like oil, but completely ignores services—which now make up a big chunk of the Indian economy. This can cause GDP growth to be miscalculated, either overestimated or underestimated, depending on how commodity prices move.
2. The MCA21 Database Issue: To estimate the output of private companies, the government relies on the Ministry of Corporate Affairs' MCA21 database. Here’s the catch: the data is extrapolated from a small sample to represent all companies. If that sample includes defunct or shell companies, it can paint a much rosier picture of growth than what’s actually happening.
3. Misjudging the Unorganised Sector: For the unorganised sector, GDP estimates rely on outdated indicators and assume it grows at the same rate as the organised sector. The problem? Events like demonetisation and GST hit the unorganised sector much harder, but this method doesn’t capture those impacts, leading to inflated growth numbers.

These flaws make us wonder—do our GDP numbers really show the true picture of India’s economy?

Now that an advisory committee is in place, there are two possible outcomes. Either they take the concerns raised by economists and experts seriously, fixing these long-standing issues to make GDP calculations more accurate. Or, we stick to the current methods and risk ending up with numbers that drift even further from reality.

EV subsidy scandal: ₹297 crore fraud

The Serious Fraud Investigation Office (SFIO) recently raided three major electric vehicle (EV) manufacturers—Hero Electric, Okinawa Autotech, and Benling India—over allegations of misusing subsidies under the government’s FAME-II scheme. These companies are accused of fraudulently claiming ₹297 crore by violating the scheme’s localization requirements, which mandate that a certain percentage of components be sourced locally. During the raids, investigators seized manufacturing records and digital data.

If this sounds familiar, it’s because the FAME-II scheme has faced similar allegations of misuse and confusion before. At the center of the issue lies a fundamental problem: what does localization really mean? Despite being a key part of the policy, the definition of localization has remained unclear, creating loopholes that some companies have exploited.

Let’s break it down. The FAME (Faster Adoption and Manufacturing of Hybrid and Electric Vehicles) scheme was launched in 2015 with a modest budget of ₹895 crore and a straightforward goal: to make EVs more affordable for Indian buyers. The second phase, FAME-II, launched in 2019 with a much larger budget of ₹10,000 crore, aimed not only at accelerating EV adoption but also at building a strong domestic manufacturing ecosystem.

Here’s where things get tricky. One of the key requirements for manufacturers to claim subsidies was localization—ensuring that a certain percentage of the vehicle’s components were made in India. While various reports cite this localization threshold as 50%, no official government source clearly confirms this number—at least nothing came up in our research. If you’ve found anything, do let us know in the comments! :)

Now, back to the news.

Here’s what we do know: the goal of localization was to reduce reliance on imports, especially from China, and to help grow India’s EV supply chain. But the lack of a clear, universally agreed definition of localization turned what should have been a simple compliance rule into a source of confusion and exploitation.

Manufacturers, regulators, and auditors have all struggled to interpret what localization really means. Should it be based on the number of components made in India? The value of those components? Or the ex-factory cost of the vehicle? Everyone seemed to have their own interpretation, and the government didn’t do much to clear things up.

This lack of clarity allowed some manufacturers to bend the rules:

• Imported parts, like motors and batteries, were labeled as “Made in India.”
• Chargers and software were billed separately to boost localization percentages.
• Some manufacturers delayed compliance, asking for repeated extensions while continuing to claim subsidies.

Audits by the Automotive Research Association of India (ARAI) revealed widespread violations. This wasn’t just a case of creative accounting—it exposed a systemic failure that damaged trust between regulators and manufacturers.

Whistleblowers brought these issues to light through anonymous emails, accusing EV makers of misreporting the origin of components. In response, the Ministry of Heavy Industries paused ₹1,100 crore in subsidies and asked manufacturers to submit compliance certificates verified by Chartered Accountants.

While some companies, like Greaves Electric Mobility, cleared their names and resumed receiving subsidies, others, including Hero Electric and Okinawa, became the focus of deeper investigations. By mid-2023, the government was already seeking to recover ₹469 crore from seven EV manufacturers for failing to meet localization requirements.

These recent raids are just the latest chapter in a long history of controversies surrounding FAME-II. Over the years, the scheme has been plagued by allegations of misuse, delayed audits, and policy confusion. Whistleblower complaints only added fuel to the fire.

FAME-II had clear ambitions: support the adoption of 1 million electric two-wheelers, 500,000 three-wheelers, 55,000 four-wheelers, and 7,090 electric buses, all while boosting local manufacturing. And for a while, it delivered results. But unclear rules around localization eventually undermined its success.

The localization mandate—whatever the official definition was—was meant to strengthen domestic supply chains. Instead, it became a major sticking point, with manufacturers, regulators, and auditors unable to agree on what compliance even looked like.

With FAME-II now winding down, the government has introduced the PM e-Drive initiative to replace it. Unlike FAME-II, PM e-Drive focuses more on production-linked incentives and comes with clearer guidelines to support EV manufacturing. The aim is to avoid the mistakes of the past by prioritizing transparency and accountability.

The SFIO raids, whistleblower complaints, and broader controversies around FAME-II highlight a deeper problem: ambitious policies cannot succeed without clear rules and strong enforcement. Localization was supposed to be the foundation of India’s EV manufacturing push, but the lack of clarity turned it into a liability.

As India moves forward with PM e-Drive, the lessons from FAME-II must be taken seriously. Clear definitions, transparent processes, and strict penalties for non-compliance are essential. The stakes are too high—not just for the EV industry but for India’s role in combating climate change. This time, we need to get it right.

The semiconductor showdown

In December 2024, the Biden administration announced a major expansion of chip controls. The new rules include restrictions on 24 types of semiconductor manufacturing equipment, new limits on high-bandwidth memory chips critical for AI, and the addition of 140 more Chinese entities to the trade blacklist. They’re also increasing oversight on chip-related software tools and technology.

Why are semiconductors such a big deal? These tiny chips power everything from microwaves to advanced military systems. But their real importance lies in emerging technologies like artificial intelligence, 5G networks, and advanced weapons systems. In 2022, memory chips made up about 23% of global semiconductor sales, while the rest were various processors and specialized chips.

The U.S. has taken a sharp turn in its strategy. Under President Biden, the focus has shifted from staying "a couple of generations ahead" of competitors to keeping "as large of a lead as possible" over China. It’s a big change and reflects the growing tech rivalry between the two nations.

This semiconductor battle is just one part of a deeper geopolitical competition. Under President Xi Jinping, China has been pushing hard for technological self-sufficiency, especially in semiconductors. This isn’t just about economic growth—it’s tied to China’s military goals through its "Military-Civil Fusion" policy, which requires companies to share their technologies with the military.

The U.S. concerns go beyond technology. There’s rising alarm about China’s actions in the South China Sea and its stance on Taiwan, where TSMC produces 92% of the world’s most advanced chips.

Let’s break down the current restrictions. The U.S. has taken a three-pronged approach to limit China’s semiconductor progress:

1. Banning exports: Advanced chips and chip-making equipment are no longer allowed to be exported to China.
2. Restricting involvement: American companies and citizens are prohibited from supporting Chinese chip development.
3. Getting allies onboard: Countries like Japan and the Netherlands have joined the U.S. in these restrictions.

But here’s the twist—these controls may not be working as planned. Chinese companies have found creative ways to bypass them. They’re stockpiling equipment, using networks of shell companies, and, most notably, developing their own technologies. Huawei’s recent Mate 60 Pro smartphone, powered by a domestically produced 7-nanometer chip, shocked many in Washington—it wasn’t supposed to happen under the current rules.

China’s most advanced chipmaker, SMIC, can produce 7nm chips, although not as efficiently as global leaders. However, China has made huge strides in mature node chips. Their share of global manufacturing capacity grew from 17% in 2015 to 31% in 2023, with projections suggesting they could hit 39% by 2027.

Where does China stand now? Despite the restrictions, they’ve made remarkable progress in several areas:

• Developing domestic alternatives for many semiconductor technologies
• Leading in sectors like electric vehicle chips
• Innovating in advanced packaging technology, which could potentially leapfrog traditional manufacturing methods

The restrictions have had a paradoxical effect. While they’ve created hurdles for Chinese companies, they’ve also:

• Accelerated China’s drive for self-sufficiency
• Reduced U.S. companies’ access to the massive Chinese market, potentially impacting their R&D budgets
• Forced Chinese firms to innovate instead of relying on existing technologies

This has resulted in the emergence of two distinct technological ecosystems. U.S. companies are losing revenue from one of their largest markets, while Chinese firms are developing independent capabilities. This growing technological decoupling could have a significant impact on global innovation and trade.

Meanwhile, India is stepping into the spotlight. Tata recently announced a ₹27,000 crore semiconductor plant in Morigaon, Assam, marking the country’s first big move into chip manufacturing. Tata Electronics is also building India’s first fabrication plant in Dholera, Gujarat, with an investment of ₹91,000 crore. India already has about 25% of the global chip design workforce, giving it a unique edge in certain parts of the industry. Other companies like CG Power, HCL Technologies, and Kaynes are also heavily investing in semiconductor assembly.

India’s emergence as a player in the semiconductor space adds an exciting new dimension to the global chip race.

Tidbits

1. Corporate tax paid by listed companies fell by 7% YoY in Q2FY25, marking the first decline in seven quarters. The dip, alongside a reduced effective tax rate, raises fiscal concerns as corporate tax receipts lag behind government targets.
2. India's Manufacturing PMI dropped to 56.5 in November, reflecting slower growth amid surging input costs. While export orders grew, domestic sales faced challenges, prompting manufacturers to raise prices.
3. The US imposed stricter chip export curbs on China, blacklisting 140 entities to limit AI advancements. These rules extend US control globally, impacting semiconductor supply chains and key manufacturers.
4. Swiggy’s 10-minute delivery service now operates in over 400 cities, including smaller towns. This rapid expansion leverages optimized dark stores and strengthens Swiggy’s leadership in fast delivery.

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This post was first published on Substack.